It’s no secret that operating within the construction industry is capital-intensive. Construction business owners need to shell out money in order to make money. Fortunately, you don’t have to finance construction projects out of pocket. Construction business loans are available to help contractors financing the costs associated with construction projects such as on-site facilities, materials, equipment and machinery, payroll, and working capital.
While it’s possible to bootstrap initial operations, eventually, you may need to apply for construction business loans to facilitate the growth of your construction company. But before anything else, it’s important to know what you’re getting into.
Factors to Consider in Choosing the Best Construction Business Loan
You’ll need to invest in the growth of your business before taking on new clients and accepting more projects. With that said, it’s important to have quick access to working capital for contractors in the construction industry.
There are different factors that determine the best type of loan for your business. As you search for the perfect construction business loan, here are six things to consider:
• Cost: Not all high-APR loans are bad. In fact, sometimes, it’s wiser to apply for short-term loans with higher rates to control your cash flow.
• Speed: If you need immediate funding, do know that working with traditional lenders take time. Check out alternative loans from online lenders instead. Application and funding process takes as little as 24 to 48 hours.
• Flexibility: Make sure to know what your company needs so you’d know which type of loan is best for you. Many business owners take on a business line of credit because of the flexibility it provides.
• Loan Amounts: Some business owners look to borrow as little as $500 while some want to borrow $5,000,000. The type of loan you’re going to pursue also depends on the amount you’re looking to borrow.
• Specifications and Requirements: The requirements vary depending on the type of loan. Make sure to ask your lender about this.
• Terms and Rates: Again, the terms and rates depend on the loan. You may have to make monthly or weekly payments; fixed or not fixed. Make sure to match loan payments to your income to prevent cash flow shortage.
Top 5 Construction Business Loans for Your Company
Now that you know what you’re looking for in a loan, it’s now time to narrow down your search. Here are the top five most common small business loans for contractors.
1. Business Line of Credit
As mentioned, a business line of credit is one of the most flexible financing options available. With a business line of credit, lenders assign you to a predetermined revolving credit line. You can repeatedly repay and withdraw from the line without having to reapply. Furthermore, you only have to repay the funds you’ve withdrawn plus the interest – not the entire credit limit. A business line of credit is great for contractors who need immediate financing to pay for expenses on a new or ongoing project. You can use the funds from the loan for any business purpose.
2. SBA CDC/504 Loan Program
We all know how hard it is for small business owners to secure funding from traditional lenders. Therefore, the government – the Small Business Administration (SBA) created loan products specifically for small businesses that struggle to qualify for funding.
One of the SBA loans is the CDC/504 loan, which happens to be one of the most popular construction business loans. SBA loans, including this one, come with low down payments, competitive interest rates, and longer repayment terms than traditional loans. SBA-approved lenders will loan you 40% of the costs to needed for the project – renovating existing facilities, building new ones, or purchasing land. Another lender will give you 50% of the project costs, while lenders expect you to provide the 10% or 20%, depending on the lender you’re working with. Repayment terms can go as long as 20 years and the interest rate depends on the U.S. Treasury market rates.
3. SBA 7(a) Loan Program
Another SBA loan suitable for construction companies is the SBA 7(a) program. You can use the funds for almost every business purpose, including the purchase construction equipment and commercial real estate. Just like the CDC/504 loan, you can receive up to $5,000,000 and the repayment terms can go up to 25 years. The 7(a) loan is one of the sought-after business loans because of its flexible use of funds, longer repayment terms, and lower interest rates.
4. Short-Term Loans
Short-term loans are great for contractors who need working capital for predictable business expenses. With short-term loans, borrowers are given a lump sum amount which can be repaid regularly, whether weekly or monthly. However, these loans can have a higher APR compared to long-term loans, but the key is to repay the loan within a year to save on interest rates. You can use a short-term loan for immediate purchases, as well as for daily business expenses, such as hiring new workers, making payroll, paying for utilities, and other business expenses.
5. Equipment Financing
In every construction project, you’ll need equipment to get the job done. However, construction equipment can be expensive and startup companies or newer firms may not have the funds to finance all the equipment needed to complete a project. Equipment financing provides you with the funds you need to lease or purchase construction equipment. Similar to traditional loans, you can repay the loan in regular installments. However, you don’t need to put up personal or business assets since the equipment being financed serves as collateral. In case of default, the lender will have the right to repossess the equipment.
Apply for Construction Business Loans Today!
Construction business loans can help keep your business afloat while you wait for your clients to pay you for services rendered. Banks loans take weeks or months before you can receive the funds. If you need cash quickly, SMB Compass offers construction business loans in as little as 24 to 48 hours.
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